Balancing the Books

Defending the Status Quo

Government got it right after the crash, says an economist, who gets it wrong in some key places. Also, turning ideas into action, re-imagining the movies, and taking aim at the media's voodoo economics.

Thank You

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"Regulatory, legal, and policy uncertainty was holding business back." That's author Mark Zandi, Moody's Analytics chief economist and CNBC-TV commentator, describing the economy in 2012. Uncertainty over the fiscal cliff, the implementation of Dodd-Frank regulation of the banking sector, the Affordable Care Act—Zandi says all these forces of uncertainty are restraining growth.

Other than that, Paying the Price is a fairly conventional defense of almost everything the Obama administration has done to shore up the economy. If you're looking for that sort of case, this is the book for you—with one exception. If you prefer to believe, along with President Obama, that the government-sponsored enterprises Fannie Mae and Freddie Mac played a minor role in the housing bubble that sparked the Great Recession, contrary to those who charge them with a major role, the author will disappoint you on that issue.

Paying the Price: Ending the Great Recession and Beginning a New American Century

But it's not for lack of trying on Zandi's part. He does try to exculpate the mortgage giants, but his attempt does not even make good nonsense.

Paying the Price offers the most value on the subject of the banks. As the author notes, his firm, Moody's Analytics, advised top banks during the bank stress tests of 2009. The stress tests were supposed to determine whether the biggest banks could survive something worse than the Great Recession; if not, they had to get more capital from the open market or the government's hated and strings-attached Troubled Asset Relief Program. He says the tests "seemed a gimmick to me until I heard the loud screaming from the bank executives."

There's a lesson here, one that Europe's wimpier stress tests didn't take to heart: When it comes to capital ratios, if the executives of the too-big-to-fail banks aren't screaming, you're probably not doing it right. Most of these banks kept low capital ratios for decades. When the crisis hit they got bailed out by TARP, the Fed's low interest rates, and the Fannie, Freddie, and AIG bailouts. Afterward, they wanted to go right back to business as usual.

Zandi is right to say Dodd-Frank's multi-pronged approach to fighting too-big-to-fail is the right way to go. Contrary to the claims of some, you don't end bank bailouts forever by passing a law that ends bank bailouts forever. As we saw in 2008, if you're against bailouts on 99.999% of the days and in favor of bailouts on 0.001% of the days, you're basically in favor of bailouts. The best way to stop bailouts is the belt-and-suspenders approach: higher capital ratios, pre-rehearsed bank "funerals," and debt that converts to equity in a financial crisis. Dodd-Frank includes all three.

There are plenty of areas where Zandi tells only part of the story; it's his book and he's welcome to his angle. But his dismissal of Fannie's and Freddie's role in the housing bubble cries out for exposure. His discussion of the government-sponsored enterprises features a graph showing that the "nongovernment" share of subprime "mortgage originations" rose during the bubble years. From this he concludes that the private sector, not Fannie and Freddie, deserves the blame for the subprime bubble.

But by law, Fannie and Freddie are banned from originating mortgages. Instead, they buy mortgages originated by private lenders. How can a professional economist covering the economic scene not know this? And it's not just that Zandi is speaking informally in a popular book. In a report he co-wrote last year, "The Future of the Mortgage Finance System," one chart dutifully reports Fannie and Freddie's "% of total mortgage originations."

What do these graphs refer to? It's impossible to tell. One could with equal logic post a chart called, "The U.S. Treasury's Initial Public Offerings of Stock" to prove that the Treasury did not buy shares of General Motors (it did). Given Zandi's repeated assurances that Fannie and Freddie weren't to blame for the housing bubble, he should convey their relationship to the subprime mortgage market accurately. He performs this task with woeful inaccuracy.

The fact that the mortgage giants originated zero mortgages leads to evidence Zandi ignores. The two firms bought boatloads of low-quality mortgages from the private sector. A spate of federal lawsuits against a few major lenders indicate that private lenders did their best to dump weak mortgages onto Frannie and Freddie. But often enough, the two firms were willing buyers of non-traditional mortgages, trying to meet ever-more demanding affordable-housing goals put on them by the Department of Housing and Urban Development.

Zandi's assertion that Fannie and Freddie were "minor players in the crazed lending of the 2000s" is wrong, and the method he adopts as proof seriously mars Paying the Price.

GARETT JONES is the BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University.

Ideas Into Action

Four telling case studies

Reviewed by Michael Strong

Auctions selling licenses to the electromagnetic spectrum have brought the U.S. government more than $50 billion in revenue since they were first introduced in 1994. Yet when economist Ronald Coase first proposed such auctions in a 1959 paper, his ideas were widely ridiculed. In 1965, a former FCC economist turned professor described the ideas as "unworkable" and "purely the mind-spinning of an academic bureaucrat." Yet the academic mind-spin eventually got adopted, proving quite workable.

How and when does political and economic change happen? Does such change require a crisis? What role do ideas play? And how might those who hope to effect change invest their time, money, and effort? Economics professors Wayne Leighton and Edward Lopez, active promoters of free-market ideas, grapple with these urgent questions in this absorbing and inspiring book.

Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change

Leighton and Lopez take part of their title from an oft-quoted statement by John Maynard Keynes about "madmen in authority" who unwittingly heed the counsel of "academic scribblers." The madmen are the policy makers; the academic scribblers, theorists and philosophers like Keynes himself and his "great adversary," F.A. Hayek.

An essay by Hayek, "The Intellectuals and Socialism," also helps inspire the book's title. The intellectuals are the "opinion makers who trade in ideas." Hayek argued that the intellectuals' support of socialism during the years following World War II proved decisive in getting those ideas accepted.

The intellectuals, the academic scribblers, and of course, the madmen, play a crucial role, for good or for ill, when change occurs. The book tells four stories in depth: on the positive side, about airline deregulation, welfare reform, and the introduction of electromagnetic spectrum auctions; and on the negative side, about the policy changes that led to the 2008 housing bubble that sparked the Great Recession. In each case the authors reveal the mechanisms through which ideas that were at first formulated in books and articles later came to be realized in action.

Take one of the positive stories. The saga of airline deregulation starts in the 1960s and '70s, with an academic literature critical of regulation generally, and the Civil Aeronautics Board in particular. In 1971, economist George Stigler, who would later win a Nobel Prize, published an article on the theory of "regulatory capture," according to which regulatory agencies are often "captured," or become beholden to, the very industries that they seek to regulate.

The airline industry and the Civil Aeronautics Board were a case study of regulatory capture. Much of what the CAB did was to prevent small upstart airlines, such as Southwest, from competing with the big carriers, such as TWA. Because the CAB only regulated interstate flights, intrastate flights of the same distance were often half the cost, a pattern noticed by Senator Edward Kennedy. Eager to make his mark, Kennedy chaired a committee to investigate the airlines, which concluded in a 1975 report that the CAB reduced competition.

The big airlines might yet have been able to waylay regulatory reform had President Jimmy Carter not appointed academic scribbler Alfred Kahn head of the CAB. As an economics professor at Cornell, Kahn had published a critical work called The Economics of Regulation. In the face of airline resistance to deregulation, Kahn lined up a bipartisan coalition to continue the momentum created by Kennedy's committee. Result: Airline deregulation was passed in 1978 and the CAB was phased out entirely by 1985.

Kahn proved an effective "political entrepreneur," operating very much like a market entrepreneur by exploiting new opportunities in the political sphere. "There is great opportunity" the authors write, "for the political entrepreneur to either create or destroy value." They point out that "ideas become powerful not simply because they are conceived by academic scribblers and then filtered into society by intellectuals, but because political entrepreneurs discover ways to implement those ideas into society's shared institutions."

MICHAEL STRONG is the lead author of Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All the World's Problems.

Screen Shots

No more tinsel in this town

Reviewed by John Simon

Some arts want to be written about with predominant seriousness—say, classical music and the fine arts. Others favor a light touch, levity—say, pop music and gourmet cookery. Film, however, thrives on a melding of the two: the earnest and the funny.

This has to do with the twofold appeal of film: as movies for the masses, as cinema for highbrows. So the most successful film critics have been both serious and humorous, indeed witty, thus garnering both types of readers.

Do the Movies Have a Future?

In this collection of film essays and reviews, Do the Movies Have a Future?—a title that incidentally raises a non-issue—New Yorker film critic David Denby writes fluently enough, is thoughtful and well informed, knows his film history, has done extensive viewing and reading, and has acquired both cinematic and general culture. He has all the requisites except, alas, brilliance.

There is also the matter of tastes, which, theoretically, are allowed to differ. But when the differences between reviewer and reader prove seismic, how to avoid becoming judgmental?

Perhaps the most salient aspect of this book is that it is almost exclusively about American pictures. Only one foreign filmmaker rates an individual essay: Pedro Almodóvar. Others are mentioned, but not accorded even a full paragraph, a serious lack.

An even greater minus is Denby's likes—the dislikes, orthodox as they are, one has no quarrel with. But what about the extolling of films like P. T. Anderson's There Will Be Blood or Quentin Tarantino's Pulp Fiction? Not bad, but not masterpieces. And encomia for Avatar, and indies by Judd Apatow or Noah Baumbach, which nobody sees, needs to see, or needs to read about?

Denby also likes the occasional great film—Gone With the Wind, The Wizard of Oz, The Diving Bell and the Butterfly—and some worthy ones, like Sideways, The Hurt Locker, Capote, The Social Network, and a few by Otto Preminger, Clint Eastwood, and Almodóvar. But he's better at think pieces, to which he can bring some originality rather than reiterate the obvious.

Thus he is persuasive in his lengthy but justified screed against "conglomerate aesthetics," arguments against viewing films in small format, and deploring the excesses of digital filmmaking. He commendably defends such timeless values as solid plotting and careful characterization, exemplified by such classics as Jezebel and Stagecoach. Nor is he unappreciative of the glamour of yesterday's stars into whose shoes no new ones are stepping, or of the appeal of the now rare old-style romance.

He is amusing in his recollection of bygone cinema palaces, where they sold "Cokes in which you could drown a rabbit, candy bars the size of elephant patties," and "the gents' rooms were suffused with the odor of mentholated raspberry nesting in dry ice—you peed into fragrance." Good also about "nothing [being] more destructive of critical writing than the fear of being 30 seconds behind the zeitgeist."

You might smile at Lana Turner having "an unfortunate tendency to marry men she hardly knew (seven of them)" and about teen movies where the "senior prom is the equivalent of the shoot-out at the O.K. Corral; it's the moment when one's worth as a human being is settled at last." Good, too, is William H. Macy "who has a face like Howdy Doody gone to seed" or Tarantino's "Kill Bill, formally known as decadence and commonly known as crap."

Sometimes, though, images misfire. Clint Eastwood in Million Dollar Baby "looked like a puzzled cobra." Or the young women working for the fashion magazine in The Devil Wears Prada being "perpendicular girls in Galliano and heels [who] race through the corridors like cranes en pointe." Or, again, Zoe Saldana in Avatar looking "like a painted Amazon on a Milan runway." Forced, all of them.

What should one read Denby for? Besides the two essays on Joan Crawford and the stars, there are the chapters on two film critics. The essay on critic James Agee is dutiful and respectful; the one about Pauline Kael and her circle, fascinating. Denby himself was one of the so-called Paulettes—young, worshipful disciples of Pauline, whom she nurtured and for whom she found good jobs. But he seceded after she advised him not to be a film critic and suggested he try producing instead. Thus he writes both as a follower and an independent, and provides a credible account of Pauline Kael as a demanding den mother "more interested in power than any man or woman [he] ever met."

Incidentally, the chapter on Kael includes a brief anecdote in which she hurls at "the elaborately educated Europhile slasher John Simon" this withering remark—"John, you're too old to be writing like a punk"—in response to which male witnesses are quoted as murmuring, "ball breaker." For the record, I do not remember her ever saying such a thing to me, nor would it make sense. My adversaries have portrayed me as a European-style egghead out of touch with America (note Denby's own "elaborately educated Europhile"), so the problem would not be punk, but not punk enough.

What we have here is a mixed bag of some valid and some highly questionable stuff, and an already preexistent feeling that the movies do have a future, even if not the one envisaged by David Denby.

JOHN SIMON has published six books on film, and several other arts, including John Simon on Film: Criticism, 1982-2001. He is the theater critic for the Westchester Guardian and Yonkers Tribune.

Assume a Pen

An economist's epistles

Reviewed by Gene Epstein

Is it possible to write an insightful book on economics and be funny in the process? George Mason University economics professor Donald Boudreaux, keeper of the blog CafeHayek.com, proves it's quite possible. As author of this delightful collection of letters to editors that take aim at the hypocrisy and half-wittedness rife in media pronouncements on the dismal science, Boudreaux follows in the footsteps of Frédéric Bastiat, the great 19th-century French economist who also used humor and satire to puncture commonly held myths.

Hypocrites & Half-Wits: A Daily Dose of Sanity from Café Hayek

Try Bastiat's "Petition of the Manufacturers of Candles...and...Everything Connected with Lighting," in which the French Parliament is exhorted to protect the lighting industry from "the intolerable competition of a foreign rival"—the sun. One of Boudreaux's updates on the hatred of foreign trade is a letter to the New Yorker magazine, in response to an article citing then-CNN commentator Lou Dobbs as believing "unequivocally" that free trade harms middle-class Americans. Noting that CNN broadcasts in every area of the globe, and is thus shamelessly participating in free trade, Boudreaux calls on Dobbs, as a "courageous man of principle," to "inform his bosses…that they contribute to the demise of middle-class America by broadcasting."

On an issue recently made topical by Hurricane Sandy, our critic writes to economist Peter Morici about his view that Hurricane Irene would lead to positive outcomes. As Morici explained, due to the rebuilding, "the capital stock that emerges will prove more economically useful and productive." This inspires Boudreaux to offer to come over and destroy Morici's house and car, since newer versions will surely be "more economically useful and productive."

Hypocrites and Half-Wits is the perfect stocking-stuffer for the friend or relative who has everything—except the economic wit and wisdom of Donald Boudreaux.